McKesson Stock Falls By Half / S.F. firm overstated new unit's sales

Published 4:00 am, Thursday, April 29, 1999

McKesson HBOC Inc. lost nearly half its value on Wall Street yesterday after the San Francisco drug distributor said it had overstated the revenues of its new software division.

Investors slammed McKesson's shares down $31.25 to $34.50, which slashed more than $9 billion off its market value. McKesson was the most actively traded issue on the New York Stock Exchange yesterday.

The stock plunge came after the company released the results of a year-end audit that revealed that HBO & Co., McKesson's newly acquired software division, had prematurely booked $42.2 million in sales during the fiscal year ended March 31, before customers had taken final delivery of the software.

Although $42.2 million is a relatively small slice of McKessonHBOC's more than $23 billion in revenues, investors reacted viciously because HBOC had been seen as the fastest-growing, most-profitable part of the business.

Indeed, the restatement in sales forced McKessonHBOC to reduce the fiscal 1999 earnings it reported just last week from 84 cents per share to 75 cents.

The McKesson side of the business contributed more than $20 billion in revenues, compared to just $1.8 billion for HBOC.

Despite the disparity in revenues, HBOC contributed 50 to 55 percent of the merged company's profits, before yesterday's restatement, said analyst Leonard Yaffe of NationsBanc Montgomery Securities in San Francisco.

Even after yesterday's restatement, Yaffe still expects HBOC will deliver at least half of the company's profits.

"The whole rationale for the merger between McKesson and HBOC was to get the faster revenue growth and fatter margins of the software business," said Robert Gold, an analyst with S&P Equity Group in New York. "Now the best case we're seeing is a 5 percent revenue growth for HBOC, versus double-digit growth we'd been told to expect."

The auditors found that in about a dozen instances, HBOC salespeople had booked sales with customers who still had contingencies on their orders. For example, Kurtz said, a sale might be contingent on demonstrating that the software doesn't have a Year 2000 problem.

Kurtz said the restated revenues of $42.2 million include $26.2 million recorded in the fourth quarter, after McKesson merged with HBOC, and $16 million recorded in the three quarters before the merger.

He said McKesson's auditors are still checking to see if any other software deals were booked prematurely, holding open the possibility of another earnings restatement.

Kurtz declined comment on just who might be to blame for the accounting errors. Albert Bergonzi heads the software division that booked the premature sales. Bergonzi had been president of HBOC before the merger. He reports to Mark Pulido, who was chief executive of McKesson before the merger, and who retains that position.

Completing the merged company's top management team is Charles McCall, now chairman of McKessonHBOC. McCall had been chief executive of HBOC before the merger and Bergonzi's superior.

Nine law firms already have signaled their intent to file shareholder class-action lawsuits against McKessonHBOC.

In recent years, other software firms, including Bay Area database vendors Informix and Sybase, have been forced to restate earnings because of questionable sales bookings. Gold, the S&P analyst, said yesterday's news came as a shock to people like himself who know more about drug distribution than software sales.

"In my mind, it's 'Welcome to the software world,' " Gold said.

Yaffe, the NationsBanc analyst, thinks investors overreacted to yesterday's news. "We feel the stock should be bought based on where it traded yesterday," he said.

But Gold, the S&P analyst, cautioned that McKessonHBOC is still continuing the audit and could have more bad news to come.